Zero-Coupon Bonds
Zero-coupon bonds (“zeros”) represent a type of bond that does not pay interest during the life of the bond. Instead, investors buy these bonds at a steep discount from the “face value” (the amount a bond will be worth when it matures). When the bond matures, investors will receive single payments equal to their initial investments plus the accrued interest. Available in the secondary market and issued by the U.S. Treasury, corporations, and state and local government entities, zeros typically have long maturity dates, such as 10, 15, or more years. The initial price of a zero depends on the number of years to maturity, current interest rates, and the risk involved. For example, a zero-coupon bond with a face value of $5,000, a maturity date of 20 years, and a 5% interest rate might cost only a few hundred dollars. When the bond matures, the bondholder receives the face value of the bond ($5,000 in this case), barring default. The value of zero-coupon bonds is subject to market fluctuations. Because these bonds do not pay interest until maturity, their prices tend to be more volatile than are bonds that make regular interest payments. Interest income is subject to ordinary income tax each year, even though the investor does not receive any interest until the bonds mature. The return and principal value of bonds fluctuate with changes in market conditions. If sold prior to maturity, a bond may be worth more or less than its original cost.
The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright © 2012 Emerald Connect, Inc. |
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Investors should consult with their own professional advisor regarding the potential tax, estate, and legal considerations that may arise in connection with entering into a life settlements transaction. Proceeds from a life settlement transaction may be taxable under federal or state law to the extent the proceeds exceed the cost basis. The proceeds from a life settlement transaction may be subject to claims of creditors. The receipt of proceeds from a life settlement transaction may adversely impact eligibility for government benefits and entitlements. The amount received for the sale of the Policy may be impacted by the circumstances of the particular purchaser of the Policy, the insured’s life expectancy, future premiums, the death benefit, the terms of the Policy, and the current market for insurance policies, among other factors. The amount received for the sale of the Policy may be more or less than what others might receive for the sale of a similar policy. There may be high fees associated with the sell of a Life settlement.
Any tax advice contained herein is of a general nature and is not intended for public dissemination. Further, you should seek specific tax advice from your tax professional before pursuing any idea contemplated herein. This advice is being provided solely as an incidental service to our business as a financial planner.